The United Nations Climate Change Conference and Electric Utilities AEP and Southern Co.

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 |  Includes: AEP, SO
by: Jim Delaney

Leading up to the United Nations Climate Change Conference (COP15) a group of clean planet people launched the “Hopenhagen” initiative to raise awareness of the event as well as display optimism that some meaningful progress would be made towards having the world agree on a way to cut green house gasses. In the end Hopenhagen turned into Despairagen as it would appear nothing of any real consequence was achieved.

One of the reasons for the despair is that even if President Obama makes good on his promise to cut green house emissions 80% by 2050 it will not have any real impact because the source of most of the CO2 in 2050 will not be the United States or any of the other developed nations but those countries considered emerging economies.

China currently emits 30% more CO2 a year than the U.S. and it is not promising to cut actual emissions but what they call their carbon “intensity” which is a fancy way of saying “emissions per unit of GDP”. They do claim, however, to be cutting carbon intensity by 4% a year and at that rate they could reach 70% by 2040. This might seem like progress but what needs to be remembered is that China’s growth target is 10% so that a 4% drop in intensity equals a 6% increase in total emissions when the growth is factored in.

Due to its carbon inefficiency China’s carbon intensity is now five times that of the U.S. and by the time it cut’s that intensity by 45% its total yearly emissions will be twice that of the U.S. Another way to think of it is that every 10% cut by the U.S. is negated by a single year of China’s growth.

On the positive side it seems that China is pressing forward with a host of green technology initiatives including a $1BN project that turns coal into a gas before burning it. Because the gas burns more efficiently less coal is needed to produce the same amount of electricity.

Developing nations are seeking billions of dollars under the terms of the Kyoto Protocol which requires industrialized nations to subsidize the promotion of green technologies in developing countries. The U.S. and E.U. have said they would be willing to provide their “fair share” of the $10BN global figure to be paid each year from 2010 to 2012 but that is not meeting with acceptance by all recipients. That amount “would not buy developing countries’ citizens enough coffins”, was how Lumumba Stanislaus put it. Mr. Stanislaus is the U.N. ambassador for Sudan and also represents the “Group of 77” a body that includes China, India and Brazil.

Todd Stern, the chief U.S. climate negotiator had his own view on the subject saying, “I don’t envision public funds – certainly not from the United States – going to China”.

Back here at home Mike Morris, CEO of American Electric Power (NYSE:AEP) ,is already going down the carbon capture trail at the company’s Mountaineer power plant in West Virginia saying that the results so far have “exceeded expectations”. “This is an extremely expensive undertaking but the answer is near at hand”, he said. The answer to which MM is referring is retiring 25% of the company’s coal-burning power plants and installing advanced carbon-capture equipment on the remaining 75%.

The “extremely expensive” part is a doubling of the cost of the electricity produced by the remaining plants from 4 cents to 8 cents but Mike also believes this would still be cheaper than electricity from the next generation of nuclear plants and as such he’s going the retrofit route.

Southern Co. (NYSE:SO) and Summit Energy Co. (Private) are two other U.S. power producers that have applied for and received money from Uncle Sam to develop carbon capture technology.

AEP, like many of the utilities at the moment has seen its CDS fall and stock rise as of late. That “late being 11/30 when the CDS peaked at 72bps and 10/28 when the stock hit its lowest point since July ($29.66). The CDS closed Friday at 54bps, the lowest level since the high that was mentioned and the stock closed at $35.08 which was down from the $35.58 level reached on 12/11 but still holding at $35 handle.

SO repeats the same pattern with a CDS close on Friday of 45bps and a near term high of 65bps on 11/23. The stock went from $33.48 on 10/21 to $30.99 on 10/33 and then back to $34.22 on 12/11 (a bit bi-polar to say the least) before closing at $33.79 on Friday.

Enjoy the Holiday shortened week.